Real estate developers are bracing for a possible squeeze on cash flows, at least in the short term, as the Real Estate (Regulation and Development) Act, 2016 (RERA) comes into effect from May 1.
Under the new law, 70 percent of the funds raised from home buyers in a particular project have to be set aside in an escrow account till they are handed the possession. This requirement will stop builders from transferring cash from one project to another, hurting their working capital, said Saumil Daru, chief financial officer at Oberoi Realty Ltd.
While small and local builders are expected to be worst hit, larger players with over-leveraged balance sheets will also have to brace for a liquidity crunch, at least in the short-term. Two out of the top five listed real-estate developers have a higher debt-to-market capitalisation ratio than the industry average.
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The Act also stops developers from launching projects before getting approvals, which means builders will have to bear the expenses of approvals. On an average, real-estate developers look to get one-eighth of the total sales value from pre-sales booking, according to Ashutosh Limaye, head of research and Real Estate Intelligence Service at property consultant JLL.
RERA is likely to introduce a structural shift in the developer's cash flow profile, as the era of front-ended cash flows (through pre-sales, soft launches, etc) in residential projects will come to an end.SBI Capital Securities' April 27 Report
The implementation of the Act could also lead to a slowdown in the sector for a short period as developers will be in the transition phase.
It could take a few months for builders to get a grasp of the new law and its various clauses. They may adopt a cautious approach to new project launches in the initial months. However, this will not be drastic.Anshuman Magazine, Chairman - India and South East Asia, CBRE
Also Read: RERA Set To Empower Homebuyers
Beyond The Short-Term Pain
Greater transparency and accountability in the sector is expected to increase investor confidence in the long run, resulting in greater institutional fund flow.
The Act is expected to be beneficial for both consumers and developers in the long run, improving overall confidence, said, Rajeev Talwar, the chief executive officer at DLF Ltd., provided “RERA's aim should be to develop the current situation for home buyers and not only punish builders.”
Also Read: Five Ways RERA Will Impact Real Estate Brokers
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